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WARREN RESPONDS TO GARRETT — Sen. Elizabeth Warren (D-Mass.) emailed her response to yesterday’s M.M. interview with House Financial Services Capital Markets Subcommittee Chairman Scott Garrett (R-N.J.): “I think Congressman Garrett has this backwards and missed my point. We need to prevent the kind of loopholes in our cross-border rules that would pave the way for high-risk and out-of-control derivatives. The unregulated derivatives market made fortunes for a handful of Wall Street traders, but it helped crash our economy and devastated millions of families. The Garrett bill would lead toward the same kind of behavior, encouraging countries to race to the bottom and cut the legs out of oversight and accountability.”

FIRST LOOK: TEXAS IS TOP PRIVATE EQUITY STATE — From third annual “Private Equity: Top States and Districts” report going out this morning: “[P]rivate equity firms invested $347 billion in more than 2,000 U.S.-based companies during 2012.. … Texas received the most private equity … totaling $46.6 billion from 222 companies while Colorado's 6th Congressional District … received the largest PE investment of any congressional district in 2012 with $17.2 billion.” Full map: http://bit.ly/OBBW3Q

GDP MISS GOOSES MARKETS — Stocks popped Wednesday after the shocking drop in Q1 GDP from 2.4 percent to 1.8 percent. No one saw it coming and investors decided it meant the Fed would hold off on tapering QE3 for quite a while. Pantheon’s Ian Shepherdson: “Our core objection to the Fed’s shift in stance last week, and the key reason why we think the mooted autumn tapering won’t happen, is that we see no upward momentum in economic growth. We had expected to have to wait until next week’s payroll report to see evidence in the hard data in support of our view, but yesterday’s third estimate of Q1 GDP growth was an early gift. …

“Most of the revision was due to a cut in the rate of increase of consumers’ spending, to 2.6 percent from 3.4 percent, but net foreign trade was revised down too. … Much of the softening in domestic final demand reflects falling government spending. … It is possible … that Fed officials expect the incremental hit from fiscal policy next year to be so small that the trend in private demand is what matters, and that 2.75 percent is acceptable.”

TOP STORY: RATE RISE HITS BUSINESS — WSJ’s Jon Hilsenrath and Victoria McGrane on pg. A1: “Sharp increases in long-term interest rates, triggered by Federal Reserve statements last week, threaten sales of homes, cars and other big-ticket items that have helped drive the U.S. economic recovery. Rate increases on interest-sensitive sectors likely aren't severe enough to derail the recovery, say economists. But they arrived just as the economy's lagging growth had showed welcome signs of improvement. …

“Rates on conventional 30-year mortgages were 4.56 percent on Wednesday, up from 3.74 percent a month ago, according to HSH Associates; rates on investment-grade-rated corporate bonds went to 3.47 percent from 2.73 percent, according to Barclays BARC.LN +2.03 percent; and yields on 10-year U.S. Treasury notes were 2.54 percent, up from 1.94 percent. Rates are supposed to go up as economic growth accelerates, and their rise could represent an undercurrent of good economic news. Higher rates have benefits, such as better returns to savers. Still, Fed officials were surprised that markets pushed rates up so far so fast.” http://on.wsj.com/14yFzuP

FIRST LOOK: BP GETTING ROLLED IN THE GULF — Bloomberg Businessweek cover story by Paul Barrett “reports on how BP, which has so far spent more than $25 billion for cleanup and compensation for the 2010 Macondo oil spill, is now having to payout billions more for outrageous claims unrelated to the disaster, losses that in many cases occurred hundreds of miles away from the spill.

“BP agreed to a settlement arrangement that entitles residents and businesses in Louisiana, Alabama, Florida, Mississippi, and Texas to file for very broadly-based compensation, and the company is now at the center of a feeding frenzy. But provoking a legal fight over this issue could be a major gamble. BP risks antagonizing the judge in New Orleans overseeing the settlement cases, and the Obama administration, as well.”Story goes live at 6:30 a.m.; Cover image: http://bit.ly/14ypi94

THIS MORNING ON POLITICO PRO FINANCE – Jon Prior and MJ Lee on when House Financial Services Republicans will unveil their Fannie, Freddie bill … Jon Prior on a guide to the Mel Watt confirmation hearing … To learn more about Pro's subscriber-only coverage -- and to get Morning Money every day before 6 a.m. -- please contact Pro Services at (703) 341-4600 or info@politicopro.com.

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BIG IDEA: SEQUESTER ABOUT TO BITE? — FORTUNE's Tory Newmyer on the budget sequester: “The first sequester cuts that could rattle the recovery are due to start hitting next week, as the Pentagon begins furloughing roughly 650,000 of its civilian employees across the country without pay for up to 11-day stretches, through September.

"Measuring any ripple effects from all those unpaid vacations could be tricky, since sequestration choked off funding for the Mass Layoff Statistics program. … But the bigger point is that it remains an exceedingly stupid approach to solving our deficit problem.” http://bit.ly/14yrPQK

TOP STORY: GAY MARRIAGE ADVANCES — POLITICO’s Josh Gerstein: “The celebration Wednesday among gay rights advocates can certainly be justified solely on what was accomplished in the DOMA case: obliterating the federal government’s bans on tax, health, immigration and other marriage-related benefits for same-sex couples. ...

"While those on all sides of the marriage debate seem certain that there will be a concerted effort to drag Kennedy’s opinion into future gay rights litigation, some experts said Kennedy’s opinion does draw lines that plausibly separate it from those fights.

“University of Chicago Law professor Geoffrey Stone said Kennedy’s opinion ‘reinforces in significant rhetorical ways’ the drive to legalize same sex marriage. However, the professor said, the decision doesn’t definitively resolve many of the key arguments opponents of same-sex marriage put forward. Instead, the frequent swing justice casts those arguments as inapplicable when asserted by the federal government. ‘It’s not addressing the question of whether there are any interests a state could put forth that would be sufficient to sustain’ a ban on same-sex marriage, Stone said. “ http://bit.ly/121B88v

TOUGH IMPLEMENTATION PROBLEMS — WSJ’s Brent Kendall and Laura Saunders: “Tens of thousands of married gay couples stand to be treated just like their heterosexual counterparts when it comes to federal taxes, immigration, bankruptcy, student aid and other matters … The decision, however, presents a thicket of implementation challenges for the Obama administration. Federal laws and regulations use different ways of determining the validity of marriages, potentially setting the stage for the next round of legal battles.

“Among the toughest questions: How to treat lawfully married same-sex couples who live in states that don't recognize same-sex marriages … For some federal benefits, such as Social Security, the validity of a marriage may depend on where the couple resides. For others, such as immigration status, federal officials focus on where the marriage took place.” http://on.wsj.com/121BlIW

CALIFORNIA BAN LIFTED — FT’s Anna Fifield in Washington: “In the second decision, one that was not split along ideological lines, the Supreme Court gave the green light to California to allow same-sex marriages. The justices essentially declared that a lower court’s invalidation of California’s ban on same-sex marriage which was passed in a ballot initiative in 2008, remained in effect. … Together, the rulings amount to a double boost for advocates of same-sex marriage. … Goldman Sachs, which flew a rainbow flag outside its Wall Street headquarters, welcomed the decisions. ‘We believe that marriage equality lowers burdens and challenges imposed on employers, and will lead to building successful businesses and a stronger American economy,’ the bank said.” http://on.ft.com/11OGp4C

CROSS BORDER SWAPS FLY AROUND —

POLITICO’s Zachary Warmbrodt notes this sharp comment from CFTC Commissioner Jill E. Sommers: “No one has ever accused Gary Gensler of being reasonable. I may not totally agree with it but Commissioner Wetjen has put a reasonable proposal on the table that would achieve multiple goals. He understands the importance of working in good faith with other global regulators. Certain Senators, Chairman Gensler and biased advocacy groups still do not seem to understand that all G-20 nations made a commitment in September of 2009 to strengthen regulations for OTC derivatives.

“No commissioner has ever intended to ‘weaken’ the goals of Dodd Frank. We merely want to provide a workable structure for conducting international business between the US and those countries that have truly comparable provisions in place. The United States is not the only country in the world trying to prevent another financial crisis."

SENATORS PRESS LEW — More from Warmbrodt: “A group of six Senate Democrats, including New Yorkers Chuck Schumer and Kirsten Gillibrand, are telling Treasury Secretary Jack Lew that regulators need to take more time to better coordinate cross-border derivatives rules … In a letter … the senators told Lew that the CFTC and SEC have issued ‘different and somewhat conflicting approaches’ and that the ‘current framework does not provide the certainty needed to ensure multi-jurisdictional compliance.’ Sens. Tom Carper, Kay Hagan, Heidi Heitkamp and Michael Bennet also signed the letter.”

BETTER MARKETS, which is almost certainly among the “biased advocacy groups” cited by Sommers, wrote its own letter to Lew in response to the senators’ letter: “The CFTC should delay no more and the SEC should follow its process as appropriate. Neither should be held hostage to each other, particularly because they are largely irrelevant to each other.” Full letter: http://bit.ly/14bfGST

ALSO FOR YOUR RADAR —

SEC LOOKS FOR CASES TO TEST NEW GUILT POLICY — WSJ’s Jean Eaglesham: “Securities and Exchange Commission enforcement chiefs have drawn up a hit list of impending cases where officials intend to test their new policy of requiring admissions of wrongdoing when settling civil charges. … The handful of likely target cases include a planned enforcement action against a company alleged to have made illicit profits by charging investors undisclosed markups on top of commissions. … The new SEC leadership last week changed the agency's long-standing policy of allowing companies and individuals to settle charges without admitting or denying liability. …

"Andrew Ceresney and George Canellos, enforcement co-chiefs appointed by Ms. White, have decided not to seek admissions in deals that are very close to being finalized, the people said. In particular, the SEC won't try to reopen settlement offers already made by its staff, they added.

“Instead, the enforcement heads have zeroed in on a small number of enforcement actions where the SEC investigation is close to completion and settlement talks are due to start. The SEC hopes the first deal to include an admission of wrongdoing could come before Labor Day, the people close to the agency said. … Top SEC officials expect that only a small minority of settlements will involve admissions, people close to the agency said. The SEC in the year through September 2012 reached 714 settlements, according to consulting firm National Economic Research Associates Inc.” http://on.wsj.com/15Hy17W

BILLIONAIRE TRADER MARC RICH DIES — Reuters’ Alice Baghdjian: “Billionaire Marc Rich, who invented modern oil trading and was pardoned by President Bill Clinton over tax evasion, racketeering and busting sanctions with Iran, died on Wednesday in Switzerland aged 78. Rich fled the Holocaust with his parents for America to become the most successful and controversial trader of his time and a fugitive from U.S. justice, enjoying decades of comfortable privacy at his sprawling Villa Rosa on Lake Lucerne. Belgian-born Rich, whose trading group eventually became the global commodities powerhouse Glencore Xstrata, died in hospital from a stroke, spokesman Christian Koenig said. … Many of the biggest players in oil and metals trading trace their roots back to the swashbuckling Rich, whose triumph in the 1970s was to pioneer a spot market for crude oil, wresting business away from the world's big oil groups.

“To his critics he was a white-collar criminal, a serial sanctions breaker, whom they accused of building a fortune trading with revolutionary Iran, Muammar Gaddafi's Libya, apartheid-era South Africa, Nicolae Ceausescu's Romania, Fidel Castro's Cuba and Augusto Pinochet's Chile. In interviews with journalist Daniel Ammann for his biography, ‘The King of Oil,’ the normally secretive Rich admitted to bribing officials in countries such as Nigeria and to assisting the Israeli intelligence agency, Mossad.” http://reut.rs/12lPmpd

ABA LAMENTS NEW MORTGAGE RULES — ABA’s Frank Keating in a WSJ op-ed: “Bankers will soon step into a mortgage minefield — a no-win landscape in which every move will be fraught with peril, and in which the ultimate casualties will be the nascent housing recovery … This minefield — a set of incompatible, contradictory regulations — is a creation of the federal government. The first regulation came from the [HUD] in March, and it said that mortgage lenders can be liable for violations of the 1968 Fair Housing Act if their lending decisions have a so-called ‘disparate impact’ on minorities. No evidence of discriminatory intent or action is required …

“That’s bad enough, but on Jan. 10, the [CFPB’s] ‘Ability to Repay’ rule will take effect. This Dodd-Frank mandated rule exposes lenders to risk of litigation if borrowers default on a mortgage — unless the loan falls into a legal “safe harbor” under the CFPB’s qualified-mortgage, or QM, guidelines. For example, a loan where the borrower’s total monthly debt payments exceed 43 percent of his income would presumably fall outside the QM safe harbor. … The QM requirements will result in an immediate tightening of credit, with banks substituting a one-size-fits-all federal mandate for their own good judgment and sound underwriting.” http://on.wsj.com/14v3vyM

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